Here's one of the most bizarre facts we've seen about the China market rally

After a brief burst of exuberance in late March it appears that the appetite for Chinese firms listed in Hong Kong is waning.

As the chart below shows the Hang Seng China Enterprise Index (HSCEI), that which comprises Chinese firms listed in Hong Kong, has been on a monumental run of late. From March 27, the day Chinese authorities allowed greater access to the Shanghai-Hong Kong stock connect for mainland fund managers, the index put on a whopping 25% before slowing sharply in recent weeks.

Investing.com

The catalyst, beside greater southbound monetary flows from China to Hong Kong, was a mysterious valuation gap that developed as a result of the breakneck rally in Chinese equities seen since November last year.

The chart below, posted by Simon Ting on Twitter, shows the Hang Seng China A-H Share Premium Index. Essentially it expresses how dual-listed Chinese firms are valued in Hong Kong compared to Mainland China. A reading below 100 means valuations are greater in Hong Kong while a reading above 100 suggests they are greater on the Mainland.

It tells quite a story.

BIAU

As you can see for much of 2014 Chinese firms carried higher valuations in Hong Kong than on the mainland. However, from late 2014, around the same time the PBoC began to implement additional monetary policy easing, the valuation gap swung around dramatically with the price premium investors were willing to pay for the same firm in China compared to that in Hong Kong surging as much as 35%.

While the brief rally on the HSCEI from late March saw the premium drop to as low as 20% - strangely - it's once again heading higher. At the close of trade Tuesday it stood just shy of 32%.

That's a massive differential, and somewhat astonishing. In 2015 - a time when even the smallest amount of yield is pounced on - investors are will to pay 32% more than what they could across the border for the exactly same stock from the exactly same firm.

Can the drivers of the stock market rally on the mainland - stimulus hopes and mergers in sectors plagued by overcapacity - last? Based on the unwillingness of offshore investors to participate the answer - based on their perception at present - is almost certainly not.